Future oil prices to be determined by global politics

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Predicting the oil prices is a million dollar question; in fact, it’s a game of billions of dollars literally. The task is difficult because of involvement of too many economic variables but sometimes it gets even more difficult because of global politics. Global storage capacity has enhanced and this has become the single biggest business opportunity for the investors, particularly in Pakistan, as that would determine the energysecurity levels and dependence on the international oil supplies and the price volatility in future.

The oil price movement is largely dependent on the global politics. This is also a fact that the US is driving the world politics, and their future actions will drive where the prices will settle. The dependence of USA on the Middle Eastern, more specifically Saudi, oilis minimal — merely 16%. This was all achieved in a very strategic way in the last decade by the administration of USA — imposing ban on exports, focusing on indigenous E&P activities and enhancing the storage capacities. This development helped USA in driving the global foreign policy more effectively and efficiently. The fact is that the foreign policy of USA will also play a major role in driving the world politics and; therefore, the international oil prices. The fear of and rivalry with Chinais today one of the primary drivers of American foreign policy.

There have been conspiracy theories that the recent oil tanker attacks in the Gulf of Oman were apparently ‘managed’ to tighten the noose around Iran, on one hand, whereas in actual, they were meant to restrict China’s access to Strait of Hormuz. Crude oil is the driving engine of Chinese economy and any threats to energy security will inflict a heavy blow to the country’s economic growth. The statistics show that some 43 percent of the crude oil imported by China passes through the Persian Gulf. At present, China is the second largest energy consuming and the third largest oil importing country in the world. Despite Beijing’s efforts to ensure its energy security by diversifying its energy sources during the past years, the country is still heavily dependent on energy importfrom the Arabian Peninsula.

On the international political front, Iran surely has the location advantage, as at least four out of the five largest global importers of oil have closer geographic proximity with Iran than any other Middle Eastern exporter. On the other hand, Russia and Saudi Arabia have kind of formed a block in OPECto control the output. However, they have not been successful in making a dent on the prices, as such because of economic constraints in their respective countries. Russia and Saudi Arabia are exerting pressure on OPEC for cut in oil output but Iran wants to grab a larger market share particularly from Saudi Arabia due to traditional economic and political reasons, which they have been losing out on for the longest time due to broad based sanctions. Presently, Iran has been strolling cautiously in the current environment after the oil tanker attacks as they would never like to rock the boat with the west, particularly USA, at this stage.

Given the above dynamics and to assess where the oil prices are likely to set-in, one need to understand the pricing of the sources from where USA is meeting its energy needs. There’re two main oil sources for USA — shale and Canada. By taking the Internal Rate of Return (IRR) of the average cost of E&P of Shale, Canada & Middle Eastern oil, one may arrive at the price at which the international oil prices should settle down in 2019.

The oil prices may start picking up further in 2019 and onwards; however, that would all still, of course, depends on too many moving economic variables, in particular how the international politics pan out, available room in the global storage capacities, penetration of Iran in the international markets and actions of USA to mention a few factors.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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